Severo S.A. of Sao Paulo, Brazil, is organized into two divisions. The company's contribution format segmented income statement in terms of the Brazilian currency, the real, R) for last month is given below: Divisions Total Company R 3,675,000 1,745,500 Sales Variable expenses Cloth R 2,100,000 980,000 Leather R 1,575,000 765,500 Contribution margin 1,929,500 1,120,000 809,500 Traceable fixed expenses: Advertising Selling and administrative Depreciation 634,000 449,000 233,000 320,000 230,000 117,000 314,000 219,000 116,000 Total traceable fixed expenses 1,316,000 667,000 649,000 Divisional segment margin 613,500 R 453,000 R 160,500 Common fixed expenses 392,000 Operating income R 221,500 Top management can't understand why the Leather Division has such a low segment margin when its sales are only 25% less than sales in the Cloth Division. As one step in isolating the problem, management has directed that the Leather Division be further segmented into product lines. The following information is available on the product lines in the Leather Division: Leather Division Product Lines Garments R540,000 Shoes R760,000 Handbags R275,000 Sales Traceable fixed expenses: Advertising Selling and administrative Depreciation Variable expenses as a percentage of sales R 82,000 R 32,000 R 21,000 60% R114,000 R 37,000 R 58,000 40% R118,000 R 42,000 R 37,000 50% Analysis shows that R108,000 of the Leather Division's selling and administrative expenses are common to the product lines. Required: 1. Prepare a contribution format segmented income statement for the Leather Division, with segments defined as product lines. Product Line Leather Division Garments Shoes Handbags R RI R R 0 0 0 Sales Variable expenses Contribution margin Traceable fixed expenses: Advertising Selling & administrative Depreciation Total traceable fixed expenses Product line segment margin Common fixed expenses: 0 0 0 OR 0 OR OR 0 Divisional segment margin R 0 2. Management is surprised by the handbag product line's poor showing and would like to have the product line segmented by market. The following information is available about the markets in which the handbag line is sold: Handbag Markets Foreign Domestic R220,000 R55,000 Sales Traceable fixed expenses: Advertising Variable expenses as a percentage of sales R 42,000 42% R76,000 82% All of the handbag product line's selling and administrative expenses and depreciation are common to the markets in which the product is sold. Prepare a contribution format segmented income statement for the handbag product line with segments defined as markets. Handbags Sales Market Domestic R Foreign R R Traceable fixed expenses: R R Common fixed expenses: Total common fixed expenses R 3. Refer to the statement prepared in (1) above. The sales manager wants to run a special promotional campaign on one of the product lines over the next month. A marketing study indicates that such a campaign would increase sales of the Garments product line by R202,000 or sales of the shoes product line by R147,000. The campaign would cost R32,000. a. Compute the increased operating income for these product lines for the expected increased sales. Garments Shoes Increased operating income RI b. Based on the above results, which product line should be chosen? O Garments O Shoes